The absence of long-term borrowing and high cost of loans have made property developers to turn away from commercial banks and embrace affordable housing finance options for the low-to-middle income market.
For years, private developers have relied on short-term loans from banks to finance housing constructions. However, rising interest rates and inflation have limited such modes of project financing. Currently, the relationship between banking and real estate operators has not been beneficial but an escalated crisis in the industry, leading to credit squeeze on developers.
The Central Bank of Nigeria (CBN) has consistently raised interest rates in response to inflation, increasing the interest rate from 11.5 per cent to 18.5 per cent in May this year, as part of strategies to reduce inflation and mop up liquidity. Currently, the interest rate on commercial bank loans hovers between 18 per cent and 28 per cent following the increase in Monetary Policy Rate, while interest rate climbed to 30 per cent.
Also, the inflation rate accelerated for a sixth month to 24.08 per cent in July 2023, the highest since September 2005, compared to forecasts of 23.7 per cent. The influence of inflation on building materials cost made it inevitable for developers to seek external support to finance projects and mitigate housing shortfall.
The Guardian gathered that eligibility requirements for real estate developer loans also constitute a disincentive to take up such facilities. For a developer to qualify for any real estate loans, the developer must meet certain minimum requirements, which are considered stringent.
Many developers revealed that lending from banks has become unsustainable if they are to maximise returns on investments. Hence, their search for new options and deployment of private equity finance, crowdfunding, bonds, co-funding or partnerships with interested parties, which may not be as friendly as well, but considered less stringent than bank loans.
“If you seek funds via crowdfunding, you would typically set up a profile of your project on your website, then use social media and various networks of business, family and friends to raise the money. Family and friends can also offer credit on a flexible, long-term and low-cost (or free) basis. But ensure that the terms of any loan are clearly understood by both parties,” the source explained.
The Chief Executive Officer, Lagos-based property development firm, Messrs Tetramanor Limited, John Beecroft, said: “Last year, we made a proposal to a bank and they were preparing to get us funds at about 17 per cent. We started documentation, but by the time they were ready to release the fund, the bank’s interest rate had reached 27 per cent. We had to pull out because it is totally unreasonable. You can’t fund a project at 27 per cent. The interest for one year will wipe off your profit.”
He disclosed that the firm had to seek an alternative, by opting for foreign equity investors in one of its projects. He said it could be difficult with the requirements but it is worth looking into and exploring.
According to him, there are private equity financing options in Nigeria but they are usually small and focused on tech-start-ups. He advocated establishment of a venture capital that focuses on real estate, adding, “It will go a long way in helping the sector to grow.”
Beecroft said besides the suggestion that the government should set aside funds for the lower end of the property market, the issue of collaterals for loans should be simplified.
Chairman, Real Estate Development Association (REDAN), South-West, Mr. Debo Adejana, stated that interest rates on construction loans are becoming high, adding that property developers cannot continue with such situation; hence, they are looking for loans from sources that are non-banking, whose interest rates are lower than the banking cost.
He said: “One of the attractive ways developers are looking at is to work with equity partners rather than obtain loans from the banks. It is better if partners bring in money and share both profits and risks than borrowing and paying at a high cost, while the person is not sharing any risk with us.
“What the government needs is to look at ways the economy can be improved. If we say the government should give incentives to the real estate sector, every other sector also needs incentives. The general focus should be how to encourage investment across all sectors.
“One of the drivers of the economy is construction and real estate business, with the position it occupies, the government should make it more attractive to private developers. Home ownership initiatives or opportunities should be encouraged by incentivising it to boost the real estate sector.”
Head of Research, Diya, Fatimilehin and Company, Mr. Tola Oyenekan, said developers are becoming innovative on ways to source funds for real estate projects through partnership, and corporate assistance, as well as the use of off-plan product arrangement, even though it has its disadvantages at the moment.
Oyenekan emphasised the need for huge capital from the government and capital market in the form of bonds. “Real estate requires huge capital but bank loans are no longer attractive for real estate projects, what needs to happen is developers having access to huge capital, which can come from government and capital markets. The capital market has become more accessible for real estate developers and the government must be ready to partner with the private sector to develop the real estate sector,” he said.